The FTSE 100 tanked Wednesday as UK inflation data came in hotter than expected, sparking a selloff in bonds and equities.
Although inflation fell materially in the year to April, the 8.7% increase in prices was significantly higher than economists’ estimates of 8.2%.
The Bank of England will likely have to hike rates more than once if inflation remains elevated. Markets are now pricing that UK interest rates will rise to 5.5%.
Early signs markets were piling pressure on the Bank of England came from bond markets where yields on short-dated UK government bonds jumped over 20 bps in early trade on Wednesday.
“Bond markets took one look at the latest inflation figures and took the view that interest rates are going to keep going up. The UK 10-year Gilt rate jumped to 4.3% on the news, the highest level since last October and significantly ahead of the 3% level seen only three months ago,” said Russ Mould, investment director at AJ Bell.
“Sticky inflationary pressures, particularly in food, will strengthen the argument for the Bank of England to raise rates again. That will bring more pain to companies and consumers as the cost of servicing borrowings becomes more expensive.”
The pound soared to 1.24721 against the dollar before falling back. The hot inflation read sparked a selloff in UK-facing equities, and very few FTSE 100 stocks were gaining on Wednesday.
The FTSE 100 was down 2.1% at the time of writing.
FTSE 100 Movers
In recent months, stocks highly exposed to interest rates and consumer spending have made steady gains on hopes the BoE were nearly finished hiking rates.
These hopes were dashed today, and sectors reliant on the UK economy were heavily hit.
Persimmon led the housebuilding sector lower with sharp losses in Taylor Wimpey, Barratt Developments and Berkeley Group Holdings. Persimmon was the FTSE 100’s worst performer at the time of writing, down over 5% and approaching the lowest levels of 2023.
Gyrations in the bond market served as a reminder of the volatility after Truss’s doomed budget last, and asset managers and insurance companies fell heavily on Wednesday.
Aviva, Legal & General, Prudential and Pheonix Group Holding were among the top fallers.
Ocado was the FTSE 100’s top riser, up over 7%, despite indications the food retail and technology company would be demoted to the FTSE 250. According to data from the FCA, Ocado is one of the most heavily shorted stocks by funds, and today’s move may be a round of short covering.